Introduction and Summary

CEO pay continues to be discussed extensively in the media, in the boardroom, and among investors and proxy advisors. CEO total direct compensation (TDC; base salary + actual bonus paid + grant value of long-term incentives [LTI]) increased at a moderate pace in the first part of the last decade —in the 2-6% range for 2011-2016. CEO pay accelerated with an 11% increase in 2017, likely reflecting sustained robust financial and total shareholder return (TSR) performance, before returning to 3% in 2018, which is more in line with historical rates. Our CEO pay analysis is focused on historical, actual TDC, which reflects actual bonuses; this is different from target TDC or target pay opportunity, which uses target bonus and is typically set at the beginning of the year.

As proxies are filed in early 2020, we expect to find that 2019 CEO TDC increases will be modestly higher (in the low single digits) due to low 2018 TSR (-4% S&P 500 TSR) and economic uncertainty during Q1 2019 when LTI grants were made. Increases in 2019 actual pay will be primarily driven by higher cash bonuses as most companies had strong financial performance in 2019 and exceeded annual goals.

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CEO pay continues to be an extensively discussed topic in the media, in the boardroom, and among investors and proxy advisors. CEO total direct compensation (TDC; base salary + actual bonus paid + grant value of long-term incentives [LTI]) has increased at a moderate pace in recent years—in the 2-6% range for 2011-2016. However, CEO pay accelerated in 2017 at an 11% increase, likely reflecting sustained robust financial and total shareholder return (TSR) performance. Our CEO pay analysis is focused on historical actual TDC, which reflects actual bonuses; this is different from target TDC or target pay opportunity, which uses target bonus and is typically set at the beginning of the year.

As proxies come out in early 2019, we expect 2018 CEO TDC increases may be in the upper single or low double digits based on past pay trends as a result of strong earnings growth and a tight executive labor market. These likely large increases will be further supported by +22% S&P 500 TSR in 2017.

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CEO pay continues to be a widely debated topic in the media, in the boardroom, and among investors and proxy advisors. As the U.S. was in the heart of the 2008-2009 financial crisis, CEO total direct compensation (TDC; base salary + actual bonus paid + value of long-term incentives [LTI]) dropped for 2 consecutive years. As the U.S. stock market sharply rebounded and the economy started to slowly grow again, CEO pay also rebounded. Large pay increases occurred in 2010, primarily in the form of larger LTI grants. Since then, year-over-year increases have been fairly moderate—in the 2% to 6% range for 2011-2016.

We expect that 2017 CEO TDC will likely be up in the mid-single digits (at the upper end of the recent range or slightly higher) based on past pay trends, accelerated earnings growth projections, a relatively stable global economic environment, and preliminary signs of a growing U.S. economy. Executives in industries with favorable economic conditions and higher growth will more likely see bigger pay increases than those in slow-growth industries.

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With the introduction of say-on-pay (SOP) in 2011 and the increased clout of proxy advisory firms on executive compensation program designs, the performance share unit (PSU) has become a common feature of executive long-term incentive (LTI) programs among U.S. public companies.

PSUs at many companies have now been in place for ≥10 years, which provides an opportunity to thoroughly review the historical trend in PSU payouts in order to assess critical questions regarding program success:

1. What has been the historical payout trend in PSU awards over the 10 most recently completed performance cycles (2005-2014 grants)?
2. How did the payouts for PSU awards that included relative total shareholder return (TSR) metrics compare to that of plans based entirely on operating financial results?
3. Were PSU payout trends aligned with company TSR performance over the 3-year performance period?

This post provides a historical analysis of trends in PSU award results. With hindsight, we can objectively assess the success of this relatively modern LTI element that has become increasingly important in executive compensation programs since 2011.

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Ensuring alignment between pay and performance is challenging enough when a business is performing well. But what about during times of an industry or economic downturn, waning company performance, a shift in strategic business focus, or a period of investment when performance expectations are not as high as in recent years? Today, institutional investors and proxy advisors are hyper-focused on pay-for-performance alignment and, by extension, the rigor of performance goals. Any indication of declining incentive goals year-over-year can bring heightened scrutiny, negative commentary, and can increase the likelihood of an “against” Say-on-Pay (SOP) vote recommendation from proxy advisors. What alternatives exist for a company facing the prospect of performance expected to be lower than the prior year? What should be considered in setting incentive plan goals and what can be expected from shareholder watchdogs who closely examine performance goals and alignment with shareholders?

A recent study by Institutional Shareholder Services of over 2,000 companies indicated that 31% of short-term incentive goals and 22% of long-term incentive goals were lowered from FY2014 to FY2015. As these findings highlight, many companies find themselves in the position of how best to address performance goals that are lower year-over-year while ensuring that shareholder interests are not neglected.

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